NovaStar Class Action Defense Case-Pierce v. NovaStar Mortgage: Washington Federal Court Certifies RESPA/TILA Class Action Over Defense Objection That YSP (Yield Spread Premium) Need Not Be Disclosed In Writing

Nov 9, 2006 | By: Michael J. Hassen

Lawsuit Alleging Violations of Federal Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA) Based on Failure to Provide Written Disclosure of YSPs (Yield Spread Premiums) Allowed to Proceed as Class Action

Plaintiffs filed a class action against NovaStar Mortgage alleging violations of Washington’s Consumer Protection Act (CPA) based on the lender’s failure to disclose in writing the payment of yield spread premiums (YSPs) in violation of the federal Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA), and Washington’s Consumer Loan Act (CLA). Pierce v. NovaStar Mortgage, Inc., ___ F.Supp.2d ___ (W.D. Wash. October 31, 2006) [Slip Opn., at 1-2]. The district court denied plaintiffs’ first motion to certify a class, agreeing with defense counsel that plaintiffs had not demonstrated numerosity or typicality under Rule 23(a) and had failed to establish the predominance and superiority elements of Rule 23(b). _Id._, at 2. Defense attorneys opposed class certification largely on the ground that YSPs were not required to be disclosed in writing; the federal court agreed, holding that “verbal disclosures and independent knowledge of the YSP were relevant” in evaluating whether NovaStar violated RESPA, TILA or CLA, _id._ However, in connection with a renewed motion to certify the lawsuit as a class action, the court rejected that defense argument and granted plaintiffs’ motion.

In considering the renewed motion for class certification, the district court stated that class certification turned on “whether verbal disclosures are legally relevant” to the CPA claims. Slip Opn., at 3. Plaintiffs argued that verbal disclosures were irrelevant because the lender was required to disclose YSPs in writing under the CLA, and because violations of the CLA are per se violations of the CPA. Id., at 2. Defense attorneys argued that the CLA does not require written disclosure of YSPs. Id., at 4. While the federal court found that plaintiffs had not cited any provision of the CLA requiring lenders to disclose YSPs, it determined that this was irrelevant, explaining at page 5:

Whether NovaStar’s conduct actually violated the CLA is an issue not yet before the Court. At this stage of the proceedings, the plaintiffs have sufficiently alleged a violation of the CLA and demonstrated that the presence of verbal disclosures is arguably irrelevant to determining whether NovaStar violated the CLA.

The district court then turned to RESPA and TILA, because “the CLA also requires adherence to federal and state disclosure requirements.” Slip Opn., at 5. The court brushed aside NovaStar’s contention that TILA does not require disclosure of YSPs, stating that “whether NovaStar truly violated TILA is not now before the Court” and that “plaintiffs have sufficiently alleged a TILA violation for purposes of the motion to certify.” Id., at 6. Similarly, the federal court found it unnecessary to determine whether any RESPA requirement for written disclosure of YSPs may be satisfied by “verbal notice” to the borrower, explaining that a borrower’s knowledge of a YSP is “arguably irrelevant” to the allegation that failure to provide written disclosure is a per se violation of the CPA. Id.

Finally, NovaStar argued that “the CPA’s causation and injury elements require individualized inquiries” rendering the action unsuitable for class treatment. Slip Opn., at 7. The court disagreed, concluding that the “allegation of injury is sufficient to allow the case to proceed as a class action, and the necessity of determining the fact and extent of the plaintiffs’ injuries does not defeat class certification requirements.” Id. The court also held that “proof of reliance” was not required at the class certification stage, so the “causation requirement” does not defeat the motion. Id., at 8.

In light of its reexamination of the necessity for an individualized determination of whether verbal disclosures of YSPs were made to borrowers, the district court concluded that numerosity and typicality were now satisfied, as were the requirements of Rule 23(b). Slip Opn., at 8-10. The court held, however, that “secondary market transactions must be excluded” from the class. Id., at 9.

NOTE: NovaStar also argued that the CLA did not apply to the loans in question. Slip Opn., at 4. The district court rejected this argument because (1) NovaStar failed to provide legal support for its claim, and (2) “[w]hether the CLA governs the plaintiffs’ loans is not an issue before the Court” in that “plaintiffs have sufficiently alleged a violation of the CLA.” Id. We believe that the second point, standing alone, fails to support the district court’s ruling because if the loans of the proffered class representatives fall outside the scope of the CLA then plaintiffs would not be adequate class representatives of the putative class. See Amchem Products, Inc. v. Windsor, 521 U.S. 591, 625-626 (1997) (“[A] class representative must be part of the class and ‘possess the same interest and suffer the same injury’ as the class members.”).

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